Here's a good question: When you're looking at companies, seeking promising investments, which matters more, a company's revenue or its earnings? In other words, is it the top or bottom line that really counts?
I can understand how some people think earnings are the key. After all, you might have massive -- and even growing -- revenue, but if little trickles down as profit, then it's not such an attractive proposition. Based on this thinking, some people look for companies with hefty net profit margins, such as:
|
Company
|
Net Margin
|
|
Adobe Systems (Nasdaq: ADBE )
|
22%
|
|
Amgen (Nasdaq: AMGN )
|
31%
|
|
Coca-Cola (NYSE: KO )
|
20%
|
|
FLIRSystems (Nasdaq: FLIR )
|
21%
|
|
Oracle (Nasdaq: ORCL )
|
24%
|
|
CME Group (NYSE: CME )
|
24%
|
|
Charles Schwab
|
22%
|
Source: Yahoo! Finance.
This is a good way to look for companies with competitive edges. If a firm keeps much of the money it takes in as profit, that's compelling. But a company doesn't necessarily need big margins to produce large profits. For instance, look at Wal-Mart (NYSE: WMT ) . Its profit margin is a seemingly puny 3.3%, but its revenue is monumental, at about $400 billion a year. That turns a 3.3% margin into a $13.2 billion annual earnings haul, which is more than the entire market cap of Alcoa.
A case for revenue
But there's a case to be made for the primacy of revenue, too. For starters, earnings can often be manipulated to some degree, if a company wants to do so. Therefore, many savvy investors prefer to look at a company's cash from operations or free cash flow.
And earnings, important though they may be, are still dependent on revenue. If the top line isn't robust and, ideally, growing, then the bottom line doesn't have much of a chance over the long run. Thus, an investor looking for good stocks might do well to seek out solid revenue growth rates.
But really, I think the question of earnings vs. revenue is a misleading one -- because both numbers are good to look at. And the more numbers you examine, the more complete picture you'll get of a company. Why settle for strong earnings or robust revenue growth, when you might have both, and more?
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